The analysis of financial statements does not serve the purposes of..…

The correct answer is Option (1) → Satisfying the statutory requirement

Analysis of financial statements means studying the items of the balance sheet and the statement of profit and loss to judge the firm’s profitability, financial position and its reasons for change. It is done by choice, to help managers, investors and lenders take decisions. Preparing financial statements is required by law, but analysing them is not a statutory requirement, so this is the purpose it does not serve.

Option (2) Assessing the current profitability and operational efficiency of the firm as a whole as well as its different departments so as to judge the financial health of the firm — An objective of analysis. Judging how profitable and efficient the firm and each department is, is the first purpose listed for the analysis.

Option (3) Ascertaining the relative importance of different components of the financial position of the firm — An objective of analysis. The analysis shows how large each component (for example, current assets or borrowings) is in the whole financial position.

Option (4) Identifying the reasons for change in the profitability/financial position of the firm — An objective of analysis. Comparing figures over time shows why profit or position has changed.